Summary: Elon Musk’s acquisition of Twitter and lower treasury yields triggered a turnaround in U.S. equities. This morning in Asia, China and Hong Kong markets rallied on less than feared development in lockdowns in China and supportive rhetoric from the central bank and the State Council. Through a cut in the reserve requirement ration for forex deposits, China’s central bank signals that the pace of the renminbi depreciation has gone a bit too fast.
What’s happening in markets?
Turnaround Tuesday has limited legs. While the threat of US indices breaking below March lows continues, there was some respite into the close of Monday. S&P500 (US500.I) closed in gains of 0.6% while the tech-heavy NASDAQ 100 (USNAS100.I) was lifted by 1.3% following the Twitter deal. A decline in treasury yields also helped equities. Asian equities remained under pressure from threats of a wider China lockdown but some respite was seen as the PBoC stepped up efforts/rhetoric to support the economy. Japan’s Nikkei (NI225.I) rose 0.6% in the morning while Singapore’s STI Index (ES3) was in loss of 0.4%. Australia returned from the long weekend to witness easing commodities, especially industrial metals such as iron ore, and ASX 200 was down nearly 2%, breaking the support at 7356.
China A shares and Hong Kong stocks rebounded. With an another round of supportive rhetoric from central bank officials and pledge of the State Council to boost domestic consumption, CSI300 (000300.I) and Hang Seng Index found a bid and gained over 1%. While residents in additional 11 districts in Beijing are required to do Covid tests, the new measures are less severed than the much feared lockdowns. Chinese mega caps stocks traded in Hong Kong led the charge higher, with Alibaba (09988), Meituan (03690), Tencent (00700), JD.COM (09618) rising 3% to 10%.
USDCNH retraced after the PBoC cut the Reserve Requirement Ratio for FX deposits by 1%, bringing it from 9% to 8% effective May 15. Before the announcement, USDCNH rose to as high as 6.609 and then fell to 6.57 right afterward the PBoC move. At the time of writing, it is trading at 6.5557. There is about USD1.05 trillion equivalent of forex deposits in China so this 1% cut will increase the loanable forex liquidity in the banking system by about USD10.5 billion.
Twitter (TWTR) deals raises questions for the future of social media. Expectations of wide-ranging changes by Elon Musk, especially given his ideas around free speech on the internet, could go either way. Alternative platforms are probably already under development, but whether they will see any interest will depend on how unpopular are Musk’s changes to Twitter.
What to consider?
USDJPY in a bearish breakout ahead of BoJ. The Japanese yen is seeing a respite from two key factors: a fall in US yields and the CNHJPY cross exposure being trimmed. Japan finance minister Suzuki said that there is no truth to the media report on Japan/US discussion on joint FX intervention. While there maybe room for a further fall in USDJPY given the outsized gains we have seen so far, policy divergence between the Fed and Japan remains the key theme and any BOJ policy tweak this week remains on watch.
How long can the grain gains last? Cooler temperatures and more rains in north US are pointing to further delays in wheat production. Corn futures are also higher given wet conditions slowing planting and Brazilian corn output is likely to be lower as well. Corn is up 35% this year and Wheat up over 40%. The COT report shows massive net longs in the sector but despite strong fundamental support, the sector is exposed to a speculative sell out should the mentioned general commodity sector weakness continue.
IMF warns on Asia stagflation risk. IMF has said that the Asian region faces stagflationary outlook with growth being lower than previously expected and inflation being higher. The larger-than-expected slowdown in China due to prolonged or more widespread lockdowns, longer-than-expected slump in the property market, constitutes significant risk for Asia. Monetary tightening will be needed in most countries, with speed of tightening depending on domestic inflation developments and external pressures.
Trading ideas to consider
Around half of the S&P 500 market capitalization is reporting this week. Earnings reports from Coca-Cola (KO) and Activision Blizzard (ATVI) have continued to show a strong consumer and the ability to pass on the rising costs. Still, the disappointment from Activision Blizzard is hinting potentially at more disappointments on technology earnings this week, but only time will tell. Our equity strategist Peter Garnry wrote in a note yesterday that if US technology companies as a whole this week can show that it is insulated from inflation then investors could suddenly begin treating large cap technology stocks as an inflation hedge and prop up the broader equity market while the long tail of non-technology companies will continue to suffer from inflation.
The weakening trend of the renminbi remains unchanged. Through the cut in the reserve requirement ratio for forex deposits yesterday, the PBoC is sending a signal to the market that it considers the pace of depreciation of the renminbi over the past five sessions excessive. On the other hand, by not cutting more, not evening reversing the 2% increase made in last December, the PBoC seems also intentionally not to push back this trend in development for a weaker renminbi too much. The 8% level is still much higher than the 5% level from 2007 to as recently as May 2021. We suspect that the PBoC is aiming for an orderly depreciation of the renminbi, in particular to reverse the renminbi’s sharp appreciation versus its trading partners such as the Japanese yen, Korean Won, and Euro since September last year amid a deteriorating outlook for exports.
Key economic releases this week:
Key earnings to watch:
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy